Show some bulldog spirit in Brussels, urged one Eurosceptic Tory MP at prime minister's questions last Wednesday. "I will," replied David Cameron. He knew already from his diplomats that nobody at last week's historic summit was likely to offer him the opt-out for financial services regulation that he needed in order to be able to steer new EU legislation aimed at easing the eurozone crisis through the Commons. Without some figleaf that allowed him to claim triumph over the "technocrats", he felt he had no option but to exercise the veto. The alternative would have been a referendum on our relationship with Europe, which in turn would have spelled the collapse of the coalition, and an election before the key constituency boundary changes had been made – and against a background of rising unemployment and painful spending cuts.

The party interest was clear. Faced with a choice between doing the right thing for Britain and Europe – supporting the best designed policy possible within the best possible framework to save the euro – and the right thing for his party, the prime minister unhesitatingly plumped for the soft option. He could expect the first round of newspaper headlines to echo the inane call to show bulldog spirit and they duly delivered. Britain stands alone, they proclaimed. In an increasingly globalised, connected and mobile world, being alone, on an island, is suddenly a good place to be. "No man is an island," John Donne wrote. Try telling that to the rump of Conservative MPs who steered Cameron towards this lonely place.

But what was Britain standing alone against. Why did it show its bulldog spirit for? The list of demands to protect Britain's financial services industry from the Brussels "diktat" was phony. A financial transactions tax can only be levied by unanimity, so there was no threat to British interests. There was no EU proposal to limit the amount of bank capital requirements, as has been claimed in justification for the veto, which might have prevented the implantation of the Vickers proposals, which, in any case, Downing Street has been dragging its feet over.

The rest of the British demands – trying to limit second order regulatory proposals in financial services at some time in the future – were trivial. Our financial services industry employs around a million people; probably 10,000 to 20,000 of them might have been affected by possible EU regulatory proposals over the next 10 years – and those largely confined to hedge funds and trading desks of investment banks. This is a tiny interest to be heralded as a major national priority, one for which our relations with Europe are now jeopardised.

Cameron used the nuclear weapon of a treaty veto to combat a nonexistent threat. The bulldog bared its teeth and Europe turned its back in disdain. They shrugged and got to work. A toothless bulldog has roared off into the wilderness – powerless, isolated, pointless. This must be one of the most reckless positions any British government has adopted in an international forum in recent history.

Cameron does have a problem with his party. The demands he pitched were calibrated to be meaningless enough to let EU leaders to nod them through, thereby allowing him to present himself as having won a magnificent victory on behalf of Britain. Under pressure from the Lib Dems, there was no mention of repatriation of powers or opt-outs from labour market legislation. But no one in Europe, as Lord Ashdown writes today, is prepared to indulge the British even over an opt-out from phantom threats any longer. That was a political failure of gigantic proportions – to lack the guile and intuition to realise that patience with Britain's idiosyncratic approach to Europe had long been wearing thin in Brussels, Paris and Berlin – particularly as they grappled with more pressing economic issues than Cameron's local difficulties with the Eurosceptics.

But this was also a personal failure. Cameron has allowed his relationships with Sarkozy and Merkel to deteriorate to such an extent that he could not read the signals hinting that they would give him nothing. He seems to have failed to develop the personal relationships with Europe's leaders that might have encouraged a willingness to accommodate Britain's wishes. There are alarming signs that he lacks the emotional intelligence that a first-order statesman needs if they are to take a seat at the table of political history – forming alliances, building support, accruing political capital, nudging, cajoling. And ultimately winning. If, on the other hand, the prime minister is looking to isolate, alienate and lose the trust of political colleagues and partners, particularly at such a perilous time, then he's showing all the right qualities.

He's shown these qualities from the outset when, on becoming Tory leader, he stunned Merkel and Sarkozy by withdrawing from the main conservative grouping in the European Parliament in order to appease his Eurosceptics. He removed himself from the main conversation and he damaged British interests in the process. This decision was only ever about Cameron winning over his party. Everything that has now happened has flowed from that self-interested decision. Now Britain stands alone.

British business and financial interests are already alarmed. Inward investors are reconsidering their position. In foreign policy terms, our partners consider Britain diminished – all points made forcibly by senior Lib Dems. Nick Clegg is in an invidious position. The most pro-European party in British politics finds itself part of a government that is marginalising itself in Europe while making it significantly harder to save the euro. The party will ask itself increasingly whether it should stay in the coalition.

The Lib Dems will speak out; indeed, the weekend leaks from the Clegg and Cable camps demonstrate a mounting fury and intensity, as yet unmatched by the Labour party. Labour timidity over the EU will not do. Even in the worse case of its break-up, the core countries will try to rebuild. The best case is its survival. European integration and co-operation is a public good. It is not enough for Labour to plead it is for European engagement and that it would never have got to the point that Cameron reached. When asked whether they would have signed the treaty, Ed Miliband and shadow foreign secretary Douglas Alexander cannot twist, turn or redefine the question. The answer has to be yes – because signing the treaty would have been good for Europe and the euro and does not include a phrase or clause that directly impacts on the UK. The challenge now is for those politicians who recognise the economic, political and cultural perils of increasing isolation to find their voice.